SEC Publishes Revised Investment Adviser Marketing Rule, Effective May 4, 2021

By Jessica Morgan and Jarell Hunt

At long last, the SEC has finally published its Revised Investment Adviser Marketing Rule. effective as of May 4, 2021. Investment advisers will have 18 months following the effective date, or until November 4, 2022, to come into compliance with the Marketing Rule.

Some of the key takeaways for SEC registered investment advisers cover the expanded definition of advertising, seven principle-based prohibitions, permitted activities (testimonials, endorsements, and third party ratings), and performance results reporting.

What Is an Advertisement?

• The first prong in the definition of an “advertisement” is “any direct or indirect communication an investment adviser makes to more than one person [households are considered one client], or to one or more persons if the communication includes[i] hypothetical performance, [ii] that offers the investment adviser’s investment advisory services with regard to securities to prospective clients or investors in a private fund advised by the investment adviser or [iii] offers new investment advisory services with regard to securities to current clients or investors in a private fund advised by the investment adviser.” Exclusions from the first prong include: (a) extemporaneous, live, oral communications; (b) communications that include hypothetical performance and are provided in response to an unsolicited request; and (c) information contained in statutory or regulatory notices, filings, or other required communications (e.g., Form ADV). The extemporaneous communications exclusion does not cover prepared remarks or speeches, instantaneous written conversations such as text messages or chats, or previously recorded oral communications.
• The revisions reflect a modernized, expanded scope of potential means of communication. Communications in various forms are recognized, including emails, text messages, instant messages, electronic presentations, videos, films, podcasts, digital audio or video files, blogs, billboards, and all manner of social media, as well as by paper, including in newspapers, magazines, and the mail.
• The second prong in the definition of advertisement includes any endorsement or testimonial for which an investment adviser provides compensation, directly or indirectly, whether cash or non-cash.
• Information required in statutory or regulatory notices, filings, or other required communications (e.g., Form ADV) is excluded from the definition of “advertisement”. Also, communications including brand content (e.g., displays of the adviser’s name in connection with sponsoring sporting events, supporting community service, or supporting philanthropic efforts), educational materials, and market commentary would not meet the definition of advertisement, although the determination would ultimately depend on the facts and circumstances.
• Social Media Marketing: Whether content posted by third parties on an adviser’s own website or other hosted social media platform would be attributed to the adviser depends on the facts and circumstances surrounding the adviser’s involvement, including whether the adviser was involved in the preparation of the content, selectively deleted or altered the content, or had the authority to influence the content (even if the adviser did not exercise such authority). In addition, social media postings on the account of an associated person of an adviser could be viewed as the adviser marketing its advisory services. The adviser’s policies and procedures should be tailored to reasonably prevent the use of an associated person’s social media accounts for marketing the adviser’s services, such communications would not be viewed as the adviser marketing its advisory services.

Seven Principle-Based Prohibitions

The amendment replaces the four per se prohibitions in the Advertising Rule with a set of seven principles-based prohibitions. Advertisements may not:

1. Include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statement made, in light of the circumstances, not misleading
2. Include a material statement of fact that the adviser does not have a reasonable basis for believing it will be able to substantiate upon demand by the SEC
3. Include information that would reasonably be likely to cause an untrue or misleading implication or inference to be drawn concerning a material fact relating to the adviser
4. Discuss any potential benefits to clients or investors regarding adviser’s services or methods of operation without providing fair and balanced treatment of any material risks or other limitations associated with the potential benefits
5. Refer to specific investment advice provided by the adviser where such investment advice is not presented in a fair and balanced manner
6. Include or exclude performance results, or present performance time periods, in a manner that is not fair and balanced
7. Otherwise be materially misleading

Permitted Marketing

The amendment permits the previously prohibited advertisement of testimonials, endorsements and third party ratings. Testimonials and Endorsements are now included in the definition of solicitation activities and subject to the same conditions: no cash compensation can be paid by an investment adviser without proper disclosure and oversight, nor may it be paid to persons subject to disqualification. The cash compensation threshold for requiring a written agreement is more than $1,000 during a 12-month period. Advisory affiliates and broker-dealers are also exempt from the written agreement requirement.

Advisers may include third-party ratings in advertisements, subject to the Marketing Rule’s general prohibitions and additional conditions, if the rating or ranking is provided by an independent person in its ordinary course of its business, and the adviser has a reasonable basis to believe that any questionnaire or survey used in the preparation of the rating is structured to make it equally easy for a participant to provide favorable and unfavorable responses, and is not designed or prepared to produce any predetermined result. In the event an advertisement includes a third-party rating, the adviser must clearly and prominently disclose: (i) the date on which the rating was given, (ii) the identity of the third-party that created and tabulated the rating, and (iii) any compensation paid by the adviser, directly or indirectly, in connection with obtaining or using the rating.

Performance Advertising

Any adviser that uses performance advertising must comply with the following requirements and prohibitions:

1. Gross performance may not be presented unless net performance is also presented
2. Any presentation of performance results must include performance results for prescribed time periods
3. An advertisement may not include related performance, unless it includes all related portfolios, subject to a conditional exception
4. An advertisement may not include extracted performance, unless the advertisement provides, or offers to promptly provide, the performance results of the total portfolio from which the performance was extracted
5. An advertisement may not include predecessor performance, unless certain conditions are satisfied
6. An adviser that advertises hypothetical performance must, among other things, adopt and implement certain policies and procedures related to hypothetical performance and provide reasonably sufficient information to enable the intended audience to understand the criteria used and the assumptions made in calculating the hypothetical performance
7. Any statement, express or implied, that the calculation or presentation of performance results in an advertisement has been approved or reviewed by the SEC is prohibited

Policy and Procedure Updates

In addition to the revisions noted above, the SEC made corresponding changes to Item 5 of the Form ADV Part 1A regarding “Marketing Activities.” The Form ADV now requires disclosure as to (i) indicating whether advertisements include performance results, a reference to specific investment advice, testimonials, endorsements or third-party ratings; (ii) whether they provided cash compensation in connection with the items listed in sub-section (i) above; (iii) whether advertisements include hypothetical performance; and (iv) whether advertisements include predecessor performance.

As is true for all amended rules, investment advisers should review and update their compliance policies and procedures to reflect compliance with the Marketing Rule, including but not limited to books and records requirements relating to the dissemination of advertisements. Electronic mail archives are deemed an acceptable method of maintaining records for advertisements and communications.

If you need assistance with an updated policy, please contact any of the authors noted on this publication or the Tonkon Torp attorney that you usually engage. The above outlines the various topics discussed in the amended Marketing Rule and should be used as a guide when preparing marketing material. However, please review complete publication here or contact us for further evaluation of compliance with the Marketing Rule.

This client alert is prepared for the general information of our clients and friends. It should not be regarded as legal advice.